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Clean Energy Could Spark a Trade War Between the US and China

Colorful plastic shapes of what will become electric vehicles, Jinhua, Zhejiang Province, China.

Lucas Schifres/Getty Images

If you believe the geopolitical soothsayers, the US and China are headed for an economic confrontation. President Donald Trump has marked his first 100 days in office with efforts to roll back many of his predecessor's climate-conscious programs, making business easier for fossil fuel companies, car manufacturers, and chemical companies. China is taking the opposite tack. In the past few years, China has surpassed the US in electric vehicle sales, renewable energy capacity, and recently announced it was investing $365 billion to keep the momentum going.

That investment puts China in a prime position to lead the world in clean energy, selling its innovations to other countries looking to cut their energy bills. So if a trade war breaks out between China and the US, it may well be over clean energy.

The rest of the world is pursuing—with various levels of enthusiasm—a shift to clean technology. At the 2015 Paris climate talks, 197 nations agreed to curb their emissions and reverse the trend of global warming. Keeping those promises will require replacing much of the world's fossil-fueled energy infrastructure with alternatives like wind, solar, and batteries. “It’s certainly clear that we don’t have all the technologies we need to meet the climate challenge,” says Mark Muro, senior fellow at the Brookings Institute’s Metropolitan Policy Program. “So that means that innovation and R&D are absolutely crucial coins of the realm.” According to a recent report by Advanced Energy Economy, clean energy is worth $1.4 trillion worldwide. Coins indeed.

The US has historically been a huge innovator in clean energy. An American invented solar panels, Vermont had the first megawatt wind turbine, and naturalized citizen Elon Musk (ever heard of him?) has built the first industrial-scale battery company and arguably deserves the credit for mainstreaming electric vehicles. And the US still has a lot of momentum; renewable energy sources are starting to drop in price such that they actually undercut fossil fueled power without government subsidies.

A lot of those US innovations started off with government help. The Department of Energy's $32 billion loan program helped many clean energy companies get their start. (And despite high-profile failures like Solyndra, the overall failure rate of companies enrolled in the program is only 2.7 percent.) The DOE also funds a lot of early-stage research—through programs like ARPA-E, and tech transfer programs at many of its national labs—nurturing technology until it's ready for private companies to commercialize. "The vast majority of new technologies that scale up and become big biz success stories have many years of life symbiotically linked with government,” says Ion Yadigaroglu, partner and managing principal at Capricorn Investment Group. “There are no private subsidies for the kind of early-stage R&D work that flows from the government, and if you shut that down, then X years after the fact you see a lot less innovation flowing to the private market.”

These are exactly the kinds of programs that President Trump and congressional Republicans have threatened to axe. Also worrying are the administration's stances on immigration and trade policies. "We rely on being magnet for talented people in order to keep innovating in this sector," says Yadigaroglu. Elon Musk, who Yadigaroglu calls a "one man show in saving the world" was an immigrant.

As for trade policies, Trump hasn't yet outlined anything formal, but he has repeatedly harped on China's "stealing" of American jobs. China, for its part, says that while it doesn't want a trade war with the US, it would win.

China's Clean Advantage

That could be true, at least for clean energy. China is crushing it when it comes to adopting renewables. And US energy companies have already accused the country of unfairly subsidizing its solar panels to price out American competitors. Those American companies can take their case to court (in this case, the US Department of Commerce) and resolve the issue via tariffs on Chinese panels. But an all-out trade war would undercut the US's ability to moderate these issues in a low-key way.

Coupled with China's skill at producing low price goods, that could effectively shut the US out of the global market. “We’ve been here before,” says Muro. “Like when we lost the flatscreen TVs to foreign producers.” He’s talking about how US tariffs against foreign TV producers—beginning in the 1970s—essentially cut the domestic market out of global competition.

The US is really good at innovating, and American clean energy firms are still pretty strong sellers of technology to the rest of the world. But some indications show that's slowing down. "We’re just completing an analysis of clean-tech patenting," says Muro, of his recent work with the Brookings Institute. An interesting trend he's seeing is that growing number of the clean energy patents being filed in the US are originating in European and Asian countries. "Which does fit this hypothesis that there may well be a swing offshore of dominance of technology," he says.

That's not to say the US clean energy sector is down for the count. Wind and solar have both largely outgrown federal subsidies, and in many places compete with fossil fuel sources. The intermittency issue—the power goes off when the sun don't shine and the wind don't blow—is slowly going away. (Hawaii just opened a solar power plant with 25 megawatts of battery storage; Elon Musk recently swore he could provide Australia with up to 300 megawatts of battery storage within 100 days.)

And of course, nobody can read the future. Especially when it comes to energy, the crystal ball can be quite foggy. Trump might become a clean energy believer—$200 billion domestic contribution to GDP is hard to ignore for long. If that day comes, it'll be quite a confrontation indeed.